First, let me apologize for the hiatus in blog posts. The school year started up again, and with it everyone became a bit busier, myself included. However, I am hopefully back on track to keeping you updated and informed on Estate Planning and Elder Law.
Estate planning can be easy, and when done right it saves a lot of hassle in the end. However, this is a confusing topic and the possibility for error is huge. Being an estate planning firm, we have seen and heard all the horror stories about plans going wrong. To prevent that from happening, here is a list of the most common mistakes of estate planning.
1. Failure to plan at all!! This is pretty simple, if you don't have a plan everything can go down the drain. We've had stories of families being torn apart because they didn't know the wishes of their loved one. The claims of "She wanted me to have it" are endless, and unless you have a will to truley know, the claims can cause families to fall to pieces.
2. Having an improper or antiquated plan. This is just as bad as not having a plan. Think about where you were 10 years ago compared to where you are today. Were you married then? How about now? Do you have kids? Has someone passed away? Was someone else born? All of these changes are likely to happen in a person's lifetime and require will revisions. Old wills may also be following old tax laws, which no longer apply and can still cause problems. At the bare minimum, estate planning documents should be reviewed every five years, and they should definitely be reviewed after any major life changes.
3. Improper use of joint property. Don't be tempted to avoid estate planning by using joint accounts on property. This planning could cause huge problems. For example, if your co-owner is sued or files for bankruptcy, your valued asset will be attacked by creditors, causing you to lose it. Additionally, you could accidently disinherit people completely through joint ownerships if the co-owner doesn't know (or follow) your wishes post death. Prior planning can avoid these mishaps, but it requires thought and effort before declaring a joint owner.
4. Not properly using IRS-approved annual gift accounts. By current law, every American can gift $13,000 annually, completely tax free, to anyone they want. Of course, doing so might not be the wisest move, but it might be very effective to shrink an estate. Shrinking the estate will then lower the income tax paid by the estate. While you may not want to give these funds to family members while they are young, it is still an idea to consider later in life.
5. Failure to plan for the distribution of your pension retirement accounts. An alarming 80% of all pension and IRA monies are passed (and therefore taxed) to beneficiares named on the accounts, meaning only 20% of the nation's IRA monies are used as retirement income. In other words, we set aside pension money just in case we need it, but then don't usually touch it. And these investments can grow to astronomical numbers, but only a few people know to plan for them. Accounting for these pensions is a crucial part to your estate plan.
6. Lacking liquidity to cover estaet settlement expenses. After your passing, there will be a financial assessment, and no matter what your situation is, your heirs and executor will need cash! Because many people don't have a sound estate plan, most heirs have to liquidate assets to generate enough cash to cover estate costs. This can cause stress, which might have been avoided if there had been a strategic plan in place beforehand.
7. Improperly arranged and owned life insurance. The proceeds of a life insurance policy might pass income tax free, but they are not free from estate tax. That is, unless the policy is owned by someone other than yourself (in which case the estate would have no claim on the account). Another common mistake is the failure to name a contingent beneficiary. Millions of dollars lay unclaimed due to their beneficiary predeceasing the insured. And a third error is that many clients have antiquated policies. These policies served a purpose for when your kids were younger, or when you just started a new business. Now that times have changed in your life, it's time to change your policy so that it is more useful.
8. Not planning for the cost of long-term care. Four out of ten Americans will need long-term care, according to the Health Insurance Association of America. This costs between $40,000 and $80,000 yearly, which is definitely enough to wipe out many estates. Also, in order to apply for Medicare (or Medical Assistance), you must spend down your assets, by which point your estate might be gone or almost gone. Are you prepared to take the chance that your assets will endure any potential costs? Could you survive a long-term illness or accident financially?
9. Not leaving behind your story. When you pass, don't think of your legacy just being in financialy terms. After working with older clients, we always ask what piece of advice they can give us from their experiences. Write down this advice and your own unique history. For the most part, these histories become faded memories before disappearing forever, so make sure yours is there to be remembered.
If you enjoyed reading this post, check out this one, What Might be Missing from Your Will.